indirect taxation

 

What are Indirect Taxes?

Indirect taxes are basically taxes that can be passed on to another entity or individual. They are usually imposed on a manufacturer or supplier who then passes on the tax to the consumer. The most common example of an indirect tax is the excise tax on cigarettes and alcohol. Value-Added Taxes (VAT) are also an example of an indirect tax

Example of Indirect Taxes

Let us use the example of VAT to illustrate how an indirect tax is imposed. Say, for example, John goes to the outlet store to buy a refrigerator that’s priced at $500. When he asks the sales representative, he or she will declare the sale price, which is $500, and that is the right answer.

The refrigerator’s real value is actually less than that, but because a VAT has been added (usually 10% to 20%), the sale price is now $500. If John looks at his receipt, he will see the actual price of the refrigerator before the tax was added. It is the manufacturer of the unit or item who collects the tax from the sale price and pays it to the government.

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